Catherine Rampell: Is Trump to blame for the market dive?

Tuesday

Feb 6, 2018 at 2:56 PMFeb 6, 2018 at 2:56 PM

By Catherine Rampell

President Trump has been bragging about the stock market since he took office, attributing any upward movement to his stewardship of the economy. Curiously, with the market tumbling in recent days, he's been a teensy bit shyer about taking credit for market performance.

So: What's going on? And is Trump to blame?

Markets move in mysterious ways -- animal spirits and all that -- and you should be skeptical of anyone who claims they can definitively explain any particular twinge of the ticker. Still, we can point to at least a few factors that could be making traders nervous right now.

The first is that stocks have looked pricey for a while. Consider the long-term price-to-earnings ratio. That's a measure of how much a stock costs relative to how much that company has been making in profits. That ratio is about twice as high as the average from the past century, a sign that stocks have likely been overvalued.

In fact, the ratio for January was at its highest level since mid-2001, when the dot-com bubble was mid-pop.

Of course, we've known for a while that this measure has seemed out of whack. That doesn't explain why we had such a sharp correction mere days after Trump's State of the Union, when he went out of his way to boast about record highs on Wall Street.

So a second explanation, at least as it relates to timing, has to do with recent economic data.

Inflation has been unusually low for a while. But some recent reports suggest that could change. For instance, Friday's jobs report showed U.S. wages rising at their fastest annual pace since June 2009. This is generally welcome news, especially since we've seen such sluggish wage growth for so long. But higher wages could also be the start of higher prices -- that is, faster inflation.

If prices rise more quickly than had been expected, and the economy suddenly looks as though it is overheating, that might lead the Federal Reserve to raise interest rates more quickly than it previously suggested it would. If rates rise more quickly, that's generally bad for stocks.

In the several months leading up to Friday's sell-off, rates on 10-year government bonds had been creeping up. Rising yields can reflect anticipation of higher inflation and could also convince the Fed that it soon needs to nip inflationary concerns in the bud.

A third, and related, factor: We just got a new Fed chair. As in, on Monday morning. And that chair's approach to monetary policy -- including how quickly to raise rates in any particular environment -- is a bit of a mystery.

Investors knew that his predecessor, Janet L. Yellen, was an inflation dove, meaning she was more willing to keep interest rates low for longer. But the new chair, Jerome H. Powell, may be inclined to speed up rate hikes in response to the recent wage and bond yield data. So investors may feel it's best to err on the side of assuming he's more hawkish. Which means that, faced with a report suggesting faster inflation could be on its way, they may choose to sell off stocks, just to be safe.

Finally, there's fiscal policy to consider.

We've seen Congress and the White House decide to blow up deficits of late. That includes the $1.5 trillion, deficit-financed tax cut passed in December, as well as costly proposals for an infrastructure package, Mexican border wall, and upgrading our nuclear arsenal.

All of these measures amount to economic stimulus. But with unemployment at 4.1 percent, now is a strange time to be engaging in expansionary fiscal policy. Usually you do that when the economy needs a boost. This has led to speculation that the Fed may feel more pressure to offset, or correct for, these stimulative fiscal policies; if Congress is going to step on the gas, Fed officials may conclude that they need to step on the brakes.

And again, with a new chair, it's even more difficult to deduce exactly how hard the Fed might step -- even slam -- on the brakes.

All that said, while presidents can influence markets, they don't control them. The best thing Trump and lawmakers can do to reassure investors would be to show they take their economic policymaking responsibilities seriously and are not just trying to score short-term stock-market spikes. And that, moreover, they recognize that the market is not the same thing as the economy.

Given the ugly numbers Monday, at least, they may have finally taken this last lesson to heart.